I’ve read a lot about how if you choose to not pay off your debt, it gets sold to a collection agency and then that there’s apparently no way for them to force you to pay it off. But I mean I doubt there’s no way that, that doesn’t impact you negatively. If it didn’t, everybody would not pay back mortgages, medical bills, etc. but if everyone did that, banks wouldn’t give out loans and hospitals would run to the ground if they got no money back, no? I’m kinda confused, how does this work?
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In the US almost every part of the economy works off a credit rating system. If you don’t pay back, even assuming there’s no legal penalties (which in extreme cases there could be), you will take a credit hit.
So the players that use this strategy will have bad credit, and thus will find themselves unable to get a loan in future, will have trouble getting mortgages or rent a place, and might even have hard time finding a job.
Meanwhile sufficiently many players are interested in participating in the economy that they will pay back. And in future they will continue to be able to get loans, mortgages, etc. So this means the banks and hospitals, etc can still be in business.
Sure, if everyone stopped repaying debt, there would quickly be no creditors/future debt, at least for unsecured debt. There would essentially be a return to historical lending where most credit was collateralized or secured in some other way, lenders would institute much tighter underwriting requirements, and we’d have far less general consumer credit available. It wasn’t all that long ago that most people had almost no access to significant amounts of credit. They might be able to obtain a mortgage, and local stores might extend small lines of credit to customers they know well, but other than that, credit just wasn’t available to most people. This was the case generally as recently as the 1950’s and 60’s, at least in the US.
With respect to individuals, failing to repay debt has definite negative consequences, including less or no future credit, higher interest rates and higher down payments where credit is extended, higher rates for things like insurance premiums, potential lawsuits, etc. But those things may not be worse for an individual than continuing to service their debt, so it is sometimes a rational choice to stop repaying debt. But even those people know that they’ll lose their house if they fail to pay their mortgages. Unsecured debt (like credit cards) are another matter – the card companies generally have little recourse unless the debtor has significant assets (in which case, they can likely afford to repay their debt).
The bottom line is if huge numbers of people stopped repaying debt, there’d be significant changes to the business of lending and the businesses that depend on lending and credit. But as a practical matter, most debtors service their debts even when it’s difficult to do so.
You have what’s called a credit score, it’s basically a number that tells people how likely you are to pay off your debts. If you do as you described, your credit score will plummet and people won’t give you money anymore.
I forgot where I saw it, but there’s a convincing argument that Banks don’t want you to pay off the loans as it actually constitutes a withdrawal of money from the overall system to put things Back in Balance. While you’re in debt there is still theoretically twice as much money
Yes, it would. At the very least it would increase the cost of borrowing overall, which is really the same thing.
Banks price loans based of the probability of default and expected loss given default, i.e. what they expect to recover. Higher default probability leads to higher borrowing rates, although it’s not necessarily a direct linkage. The indirect linkage involves complex banking concepts that are more difficult to explain.
Where you are mistaken is saying there is no way for a collection agency (or other creditor) to force you to pay your debts. If it is apparent that you have money or other assets they can generally sue you in court for the money, and if you don’t pay they can seize assets. For a mortgage they would evict you from your house and take it, for a car loan they repossess the vehicle.
It depends on the kind of debt. If you don’t pay your mortgage or car loan, the lender can eventually take your house or car. So that’s negative. If you don’t pay a credit card debt then yes, technically you could avoid the debt forever but it would ruin your credit score and you would be unable to borrow money, rent an apartment, or even get certain jobs.
What most people don’t know is that there are some debts that never go away: Student loans and back taxes. Even if you declare bankruptcy, you can never expunge a student loan debt or an IRS bill. And eventually the govt can seize anything you have to get paid back including bank accounts, stocks, and even garnish your wages. No one tells you this when you’re 17 and applying to college of course, but student loans are forever.
The banks have to loan out money in order to make money on interest payments. They rely on those monthly payments to remain solvent. If enough people suddenly stopped paying, the banks would not have enough money to pay their own obligations and become insolvent.
It’s very similar to a bank run where if too many people suddenly withdraw their money, the bank won’t have enough money to meet their daily obligations.
As long as only a small portion of people do this, the banks will be fine and the only ones who suffer are those who stopped paying because they would end up with bad credit.
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